Windfall for states as rupee depreciates
While raising excise duty on petrol & diesel, the Centre said it would use the funds to tackle hike in rates, but has now washed its hands from any duty cut and wants states to take the lead
In the last six months states have made windfall gains from the current spurt in fuel prices even though it is burning a bigger hole in consumers’ pockets. They are being forced to pay all-time high prices for petrol and diesel.
According to a State Bank of India report, the increase in petrol and diesel prices is likely to swell states’ exchequers by Rs 22,700 crore over and above the budget estimates for the current financial year.
The increase translates into revenue gain of Rs 1,513 crore for every $1 increase in international crude oil prices to all the major 19 states of the country.
Since March, petrol and diesel prices have increased by Rs 5.60 per litre and Rs 6.31 per litre, respectively, in Delhi. Pump price of petrol in Delhi on Tuesday stood at Rs 80.87 per litre and diesel at Rs 72.97 a litre, an all-time high fuel price.
In fact, petrol price is closer to breaching the Rs 90 a litre mark in Maharashtra where it has climbed to over Rs 89 a litre.
“The variation in prices in various states is primarily due to different rates of the value-added tax (VAT). For example, at 39.12 per cent per litre, Maharashtra has the highest rate of VAT on petrol and at 16.66 per cent per litre, Goa has the lowest VAT. This windfall gain will have positive impact on state finances, which might push down the states fiscal deficit by 15-20bps, other things remaining unchanged,” said the SBI report authored by its group chief economic advisor Soumya Kanti Ghosh.
The SBI report points to the nature of taxation on auto fuels where the Centre levies excise duty as a fixed charge while state levies VAT as a percentage (ad valorem basis) of the value of the product.
In the ad valorem system, windfall gain is in built in the event price of product rises. This is how gains for the states have been higher than the Centre.
But, if one looks at overall gain from the petroleum sector, the Centre’s collection is still much higher than all states put together, thanks to the increase in excise duty on petrol and diesel on nine occasions between November 2014 and January 2016.
As per oil ministry’s Petroleum Planning and Analysis Cell, while the Centre collected Rs 2,29,019 crore as excise revenue from the petroleum sector in FY18, states VAT collection has just reached Rs 1,84,091 crore even though VAT rates is over 30 per cent in several states. Also, due to frequent excise duty increases, while the Centre has more than doubled its collections from Rs 99,184 crore in FY 15, the collections for states has progressively increased over last few years.
While raising excise duty on petrol and diesel when crude oil prices were low, the government said it intended to use the fund when prices rise. But the Centre has now washed it hands from any excise duty cut and wants states to take the lead.
The SBI report has also taken the view held by the Centre suggesting duty reduction by states. “We also estimate that since states are having an incremental revenue over the budgeted one, they could cut on an average petrol prices by Rs 3.20 a litre and diesel by Rs 2.30 a litre, without affecting their revenue arithmetic.
“States like Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu, Andhra Pradesh, Rajasthan and Karnataka have the privilege to cut petrol prices by at least Rs 3 from their existing rates and Rs 2.5 on diesel,” it said.
A suggestion has also been made that if the states impose VAT on base price (crude oil + transportation cost + commission), then diesel prices could drop by Rs 3.75 and petrol by Rs 5.75. However, this will result in a revenue loss of states of around Rs 12,000 crore (net of Rs 34,627 crore loss and Rs 22,700 crore gain from oil bonanza).
Already states like Rajasthan, Andhra Pradesh and West Bengal have pared rates that will bring down fuel prices by Rs 1-2 per litre. But analysts suggest a combined action is required to reduce the pain of the common man. Tax should be reduced both by Centre and states and a portion of the burden should be taken by the state-owned entities. Also, inclusion of fuel in GST should be advanced, they added.